Schlumberger chief: Oil services crisis isn’t just oil prices

HOUSTON — The oil service industry needs a fundamental shift in the way it approaches working with exploration and production companies if it’s to thrive again, the CEO of Schlumberger warned Monday.

Both services companies and their clients are being held back by an outdated business model that has disconnected service companies from their producer, stifled technological innovation and done little to hold down costs, said Paal Kibsgaard, who holds the top job at Schlumberger.

“Our industry has simply not progressed sufficiently in terms of total system performance to enable cost-effective development of increasingly complex hydrocarbon resources,” Kibsgaard said. Kibsgaard spoke at the Scotia Howard Weil conference in New Orleans, and a transcript was provided to Fuelfix.com.

As an example, Kibsgaard pointed to an explosion in exploration and production funding — money invested in drilling quadrupled over the past decade — that only boosted global oil production by 15 percent.

The problem has been somewhat obscured by low oil prices and a sector-wide retreat from drilling, Kibsgaard said. But much of the savings that oil producers are seeing are due to increased competition rather than a fundamental change to drilling, he said, and they’re likely to be temporary.

“The unsustainable financial situation of the service industry together with the massive capacity reductions mean that the cost savings from lower service pricing should largely be reversed when activity levels start picking up,” Kibsgaard said.

The root cause of the problem comes from the distance between oil companies and their contractors while planning for new wells and operating existing ones, Kibsgaard said.

For roughly the past two decades, producers have drawn up master plans in house, then gone out and contract with dozens of suppliers separately for each piece of the larger project. The lack of coordination during the planning phase, as well as the lack of coordination between suppliers, has led to high costs poor financial results, Kibsgaard said.

“We believe that project performance can only be improved by finding ways of breaking with the past and replacing the existing model with a new approach based on collaboration and commercial alignment between operators and the largest service companies,” he said.

Kibsgaard went on to outline a future for the services industry that moves more fluidly from well planning to operation, with a consolidated set of suppliers made more efficient by shared data another other high-tech improvements.

Such a consolidation could potentially benefit Schlumberger by giving it a larger share and more sway in today’s fractured oilfield services industry. The international company, which has headquarters in Houston and in Europe, is already the largest oilfield services provider.

Others in the industry have already been pulled together. Most notably, rival oilfield services giant Halliburton Co. has been attempting to take over Baker Hughes Inc. since November, when it made a cash-and-stock offer then valued at roughly $35 billion. The deal is still being scrutinized by regulators.